Interim Compensation Under Court Decree Taxable Only on Final Settlement, Not on Interim Withdrawal

The assessee, Mrs. Pratima Reddy Muthu, legal heir of late Sri Muthu Mohan Reddy, filed her return for AY 2010–11 declaring income of Rs. 1.39 crore. Her late husband, a civil contractor, had filed suits in 1994 seeking compensation from the State Government for contractual disputes. The Civil Court decreed compensation in 2009, against which the State preferred appeals. The High Court granted interim stay subject to deposit of 50% of the decretal amount, permitting withdrawal by the legal heirs without security.

The assessee and her son received Rs. 23.11 crore during the year. The Assessing Officer reopened the assessment and taxed 50% of the decretal amount with interest as income of the assessee, treating the receipt as finally accrued revenue income. The CIT(A) upheld the reassessment.

Central Issue: Whether compensation received pursuant to an interim court order, pending final adjudication, constitutes taxable income in the year of receipt, and whether the entire receipt can be taxed without segregating capital receipts and reimbursements.

ITAT’s Decision: The ITAT partly allowed the appeal. It held that the amount received under the interim High Court order did not represent final accrual of income, as the right to receive compensation remained contingent on the outcome of pending appeals. The income crystallised only upon final settlement, which occurred in FY 2010-11 relevant to AY 2011–12.

The Tribunal further held that amounts representing reimbursement of expenses and losses already incurred could not be treated as taxable income. Only the net compensation, after allowing appropriate deductions, could be taxed. The AO was directed to assess the income in AY 2011–12 after verification, with liberty to invoke Section 150, if applicable.

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